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Refinancing an auto loan
Dear Money Matters,
What do I need to know about refinancing an auto loan? How do I
go about it?
Marlene
Dear Marlene,
First, my compliments. As interest rates have fallen over the past
several years, consumers have rushed to refinance their mortgages,
but not as many have noticed that lower interest rates also offer
refinancing opportunities in other debt areas.
That means, yes, you can certainly look into refinancing
your auto loan. Like any other sort of loan, if you were forced
to settle for a relatively high interest rate when you first bought
your car, you may be able to save by refinancing.
Shop for an auto refi just as you would any other
sort of loan. For instance, there are any number of Internet-based
loan shops that advertise auto refis, so be sure to compare various
packages and costs.
If you belong to a credit union, be sure to check
with it. In Bankrate.com surveys, credit unions almost always beat
both banks and thrifts for auto loan rates. But don't overlook your
local bank or savings and loan, if for no other reason than to be
as thorough as possible.
The mechanics of obtaining the loan are rather simple.
Most lenders will rely on Blue Book values, which eliminates the
cost of a formal appraisal. You may also have to pay a modest fee
to transfer the title.
However, that doesn't make an auto refinance an unqualified,
no-exceptions winner. First, check your existing loan to make certain
there are no prohibitive prepayment penalties or other sorts of
expenses that can mitigate your refinance savings.
Additionally, don't go to the trouble of refinancing
the car if you plan on selling it soon. Also, compare the term on
your current loan with that of a refinance. If you only have a short
time left on your present loan and you opt to refinance for a longer
term, even a more attractive interest rate may not save you that
much money, since you're adding on extra payments.
Still, even slight differences in interest rates can
make a big difference. The going interest rate for a repayment term
between 12 months and 36 months is 5.9 percent (for 37 months to
60 months, 6.29 percent; for 62 months to 72 months, 7.29 percent). From there, I ran the following scenario on Bankrate's
auto loan calculator. Say you took out a $20,000,
60-month auto loan a year ago at 8 percent. That would carry monthly
payments of $405, and you'd pay $4,331 in total interest.
However, at the end of the first year, if you refinanced
the loan to a 5.9 percent, 36-month loan, you'd pay more per month
($495) but would only spend $1,526 on interest charges on the remaining
$16,316 balance. If that monthly payment seems too steep, opting
for the 6.29 interest for five years drops your monthly payment
to $317 and overall interest charges of $2,742.
Again, if there are no prepayment penalties, you can
consider tacking something extra onto the monthly $317 payment to
reduce interest charges and the overall life of the loan. Plug in
your own numbers to see what sorts of savings are possible because
chances are reasonable that they're substantial enough to make refinancing
well worth your time.
One final wrinkle -- the packages quoted above are
for applicants with excellent credit, who file their loan applications
online and who sign up for an automated payment program (they remove
the monthly payment from an account you designate).
If you find a lender with comparably attractive loan
terms, be sure to check into any specifics that may be attached
to the loan.
-- Posted: June 5, 2002
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